Salaries Are Going Up—Slowly
Wages for small business employees are projected to increase by 2.5% in 2025, which is less than previous years but still growth. Meanwhile, salary budgets across various industries are expected to rise by 3.9%. Employers aiming for stability should expect average salary increases to fall between 3.5% and 4%.
For small businesses, these numbers matter when planning payroll. If budgets are tight, performance-based pay, bonuses, or tailored benefits might be the better option to attract talent.
The Taxman Is Watching—Don’t Get It Wrong
Payroll mistakes invite problems. Misclassify workers as independent contractors instead of employees, and the IRS may penalize you. Forget to withhold taxes properly, and you could owe back payments plus fines. Running payroll for small business means handling federal and state tax obligations, Social Security, and Medicare deductions—all while avoiding costly missteps.
Then there are state-specific quirks. Some states require additional withholdings or disability insurance contributions. Others mandate retirement plan options. Keeping up with all of it means staying compliant, paying employees accurately, and avoiding government scrutiny. A missed deadline or miscalculation can mean audits, penalties, and payroll headaches you don’t need.
Pay Transparency Is No Longer Optional
Illinois, Minnesota, and Vermont will soon require salary ranges in job postings. That means guessing games about pay are done. For job seekers, this leads to better expectations. For small businesses, hiring strategy changes. Positions with disclosed salary ranges get 50% more applications and attract better-qualified candidates.
Large corporations are conducting pay audits and addressing wage gaps to avoid legal and reputational issues. Small businesses benefit from doing the same—regular reviews prevent pay compression, where new hires earn too close to experienced employees, causing internal frustration. Thirty percent of employers plan to tackle this in 2025.
Payroll Frequency and Method Matter
Most small businesses pay biweekly, with 43% of private employers following that schedule. Weekly payroll is the second most common at 27%. Monthly paychecks save administrative work but frustrate employees.
The method also matters. Direct deposit dominates, though some smaller employers still issue paper checks. Payroll automation software reduces errors, ensures tax compliance, and saves time, making it a practical investment.
Performance-Based Pay Is Expanding
Instead of fixed raises, businesses are leaning into performance-based compensation. This now includes more than hitting sales quotas or meeting project deadlines. Advanced HR systems track real-time performance through continuous feedback and 360-degree reviews, rewarding employees based on contribution rather than tenure.
Variable pay is playing a bigger role, with bonuses and incentives continuing to gain traction. It gives small business owners flexibility—rewarding success without committing to permanent salary increases.
Hiring and Wage Trends Depend on Location
Hiring rates in small businesses fluctuate depending on region. In 2024, the Northeast led with a 6.4% hiring rate in June, while the South saw 4.4% in December. These patterns will likely continue in 2025.
Regional factors also influence wages. Small businesses in the Northeast and professional services sectors are expected to show stronger pay growth. Younger workers—primarily Gen Z and Millennials—are projected to see their wages increase the most as they enter the workforce or transition into higher-paid roles.
Benefits Are Becoming More Personalized
Small businesses are offering employees more flexibility in selecting benefits. Instead of a one-size-fits-all approach, expect more businesses to offer options such as student loan repayment assistance, wellness programs, and sustainability-focused perks. Incentives for purchasing electric vehicles or using public transportation are becoming more common.
Attracting and retaining employees isn’t only about salary. Workers value total rewards packages that include bonuses, flexible work arrangements, and professional development.
Payroll Services Can Save Time and Money
Payroll processing is one of the top tasks that small businesses outsource. Handling payroll in-house requires staying updated on tax codes, benefits administration, and compliance laws. Outsourcing to a payroll provider can prevent costly errors and reduce administrative burdens.
Companies that get payroll wrong face IRS penalties, state labor law violations, and frustrated employees. Whether hiring an in-house bookkeeper or outsourcing to a firm, running payroll accurately should be a priority.
Pay Cuts Happened, But Benefits Offset Them
Nearly half of U.S. companies reduced employee pay in 2023 to control expenses, but many balanced those cuts by expanding benefits. Instead of outright salary reductions, companies offered perks such as increased PTO, healthcare stipends, and flexible work structures.
For small businesses, maintaining competitive compensation doesn’t always mean higher salaries. Creative benefits structures help attract employees while controlling costs.
Payroll matters. Get it wrong, and penalties, audits, and unhappy employees follow. Get it right, and payroll becomes a tool for recruitment, retention, and financial stability.
